Big Tobacco fesses up and pays up -- $368.5 billion, but Congress must approve the deal

(TIME, June 30) -- For five days, the negotiators, exhausted and increasingly needy of fresh shirts, darted between Washington's Park Hyatt and ANA hotels, from conference room to mezzanine, hallway to bedroom conference call. Every so often, rumpled lawyers would emerge with wildly divergent claims about the progress of the fractious tobacco talks: a settlement was imminent, negotiators had hit the worst impasse since the start of deliberations on April 3, talks were on the brink of collapse. Wait! There's a settlement! (Well, almost...) Finally, at 3:30 p.m. last Friday, a chorus of state attorneys general gathered around a microphone in the ANA's ballroom to congratulate themselves on what Mississippi's Michael Moore called "the most historic public-health achievement in history."

Although the attorneys general talked as though they had just cured cancer, in truth they may have done the next best thing. They forced the tobacco industry to concede, in so many grudging words and so many, many more dollars, that cigarettes are a deadly regimen. The companies--Philip Morris Companies, RJR Nabisco Holdings Corp., B.A.T. Industries PLC's Brown & Williamson and Loews Corp.'s Lorillard--reached a resolution with the attorneys general of nearly 40 states in which the industry will pay out $368.5 billion over the next quarter-century in compensation, drastically alter their marketing programs and submit to the regulatory heel of the FDA.

The money, divvied out in annual payments starting at $10 billion and rising eventually to $15 billion, in perpetuity, will be used to compensate states for health-care costs related to treating smokers, pay individuals who successfully press suit, finance health research and promote education programs aimed at deterring youths from taking up the evil weed. To that end, Joe Camel will soon become a has-been and the Marlboro Man will be put out to pasture, because the industry also agreed to sweeping reforms that proscribe the use of human or cartoon forms in advertising. Billboards, stadium signs, T-shirt giveaways and other promotional freebies are forbidden; so are product placements in films.

The linchpin of the agreement is the effort by the attorneys general and the public-health community--including the American Heart Association, the American Cancer Society and the American Medical Association--to cut smoking among youngsters, which has been on the rise. In fact, if the number of teenage puffers doesn't decline by 50% within seven years, the industry will be subject to additional penalties. "Only the discovery of major vaccines," said Massachusetts' Scott Harshbarger, president of the National Association of Attorneys General, "could rival what this proposal promises to accomplish."

That seemingly breathless assessment is backed by dismaying statistics that spurred the attorneys general to consensus. According to the Centers for Disease Control, each day in America 6,000 teenagers light up their first cigarette; 3,000 teens enter the ranks of "regular smokers," meaning they've smoked at least one cigarette a day for a month; and 1,000 adults die prematurely as a direct result of a decision made in adolescence to take up smoking. All told, 400,000 Americans die each year from smoking-related illnesses. Simply put, argued Connecticut Attorney General Richard Blumenthal, "we're losing lives every day we don't stop this."

Yet it will be months before the agreement becomes law, and that's if--and it's a big if--both Congress and the White House give their consent. Congress won't even consider the issue before September, and dissenting health-care advocates from the American Lung Association to Ralph Nader have vowed a fight.

The dissidents are already complaining that Big Tobacco got too much and gave too little. The proposed settlement buys them freedom from future class actions and caps the annual payout at $5 billion for past wrongdoing, so none of the companies can be wiped out by enormous judgments. Most importantly, it ensures predictability for stockholders, a prospect that in recent weeks has sent the stocks of the two largest companies, Philip Morris and RJR, soaring.

Still, for the $50 billion-a-year industry, the settlement plainly had the sour taste of a bad cigar. Tight-lipped throughout the negotiations, the industry offered up Steve Parrish, a spokesman for Philip Morris, to present its response. After confirming that agreement had been reached, Parrish said there were aspects "with which we disagree," then corrected himself: "with which we do not necessarily agree." After tersely adding that cigarette makers were "looking for a new era of tolerance with regard to the tobacco industry," he hurried away from the mike.

Under the terms of the 68-page, single-spaced proposal, manufacturers will pay $368.5 billion in damages, shelling out $10 billion up front to be followed by annual allotments that will grow from $8.5 billion to $15 billion over the first five years, then hold steady. Any monies not used to settle lawsuits--including those brought by 40 states to recover Medicaid expenses incurred for smoking-related illnesses and 17 class actions--will be applied to antismoking campaigns targeted at youths, to health research and to rigorous federal oversight of the tobacco industry.

In addition, cigarette companies will pay $60 billion in punitive damages. Of that, $25 billion will be placed in a trust fund to be used for public-health programs, with some of the remainder applied to providing health coverage for uninsured children. This aspect of the settlement, which was one of the more contentious issues of the negotiation, is tantamount to an admission of moral wrongdoing, a stunning development for an industry that for 40 years has steadfastly refused to admit any culpability or accept any responsibility for the health consequences of smoking. "Nobody's ever gotten a dime from them yet," reminds John Coale of the Castano Plaintiffs' Legal Committee, a group of 60 personal-injury law firms that made the first serious moves against Big Tobacco back in March 1994. His group has overseen all 17 class actions against the industry. Ironically, if the settlement becomes law, those class actions become moot, although the individuals they represent could make claims for settlement funds.

For tobacco interests, the touchiest issue in the endgame was the specter of document disclosure. They are still subject to lawsuits, and feared the prospect of turning their research files into a plaintiffs' library. Instead, the industry agreed to fund a repository in Washington where it will deposit a mountain of documents: all information relating to health, toxicity, addiction and marketing to minors; and all documents produced for the state suits. Documents for which industry officials have claimed attorney-client privilege will be subject to a review process before a three-judge panel.

A final hang-up to the agreement had to do with disclosure of another sort: the attorneys general demanded an end to further industry prosecution of whistleblower Jeffrey Wigand, the former Brown & Williamson executive who wielded company documents to help press his claim that the tobacco company had deliberately manipulated nicotine levels. Wigand, now a high school science teacher, becomes free to make whatever public statements he wants.

No one would have predicted such a swift outcome back in March, when this all began with the obvious but startling admission by one of the smallest tobacco companies, Liggett Group, that cigarettes are addictive and have been pointedly marketed at kids for years. The confession signaled the first real break from the industry's see-no-evil posture. Reportedly, the event prompted North Carolina Governor James Hunt to call his friend Bill Clinton. The White House then got in touch with Mississippi's Moore to ask if talks with the industry might prove productive.

Eventually, Moore found himself talking to a fellow lawyer--RJR's CEO Steven Goldstone, who before taking over the company was its general counsel and a litigator at the New York law firm of Davis Polk & Wardwell. Negotiated settlements were not unknown to him, and Moore had made it clear that the talks could not proceed without tobacco's top officers. Goldstone soon persuaded Philip Morris CEO Geoffrey Bible to have a sit-down with the opposition.

Serious negotiations began soon thereafter, as the parties moved through one marathon session after the next, taking the talks on the road from New York City to Chicago to Washington. Almost from Day One, the talks threatened to break up over any one of the three most contentious issues: punitive damages, document disclosure and government oversight of tobacco products. The first signs of serious trouble struck April 21, when Manhattan attorney Herbert Wachtell, leading the squadron of tobacco-company lawyers, demanded, "There has to be an end to the vilification." When Harshbarger calmly responded that there would be no blanket immunity for tobacco interests, recalls a participant, "you could feel the air go out of the room."

In the final week, the negotiations spread chaotically over the Park Hyatt and ANA hotels, across 24th Street in downtown Washington. At any given time, half a dozen working subgroups were meeting in conference rooms scattered around the hotel buildings. Smaller clusters of players from each side accumulated in the halls. Moore--"tough, decisive, the dominant figure," a participant called him--meandered through these scattered legal islands like his state's namesake river, picking up information and providing his judgments.

For the most part negotiators on both sides remained markedly civil, with particular cool shown by tobacco folks like Meyer Koplow from Wachtell, Lipton, Rosen & Katz. James Tierney, a former attorney general of Maine who advised the attorneys general on tactics, conceded that voices were "more apt to be raised in our caucuses than in the negotiations."

The antismoking forces had to triangulate three distinct constituencies: the attorneys general; personal-injury lawyers who had tobacco cases pending; and public-health advocates such as Matthew Myers, executive vice president of the National Center for Tobacco-Free Kids. Myers represented a public-health constituency badly split over issues such as regulation and immunity, but he managed to line most of the factions up behind the agreement. He got some help from ex-FDA director David Kessler and former Surgeon General C. Everett Koop, co-chairmen of a commission charged with formulating a national policy toward tobacco.

The historic settlement, of course, could become history if President Clinton fails to provide the sort of enthusiastic endorsement that will pressure Congress to begin serious review of the deal. Though Clinton helped set the talks in motion, in part by proposing to let the FDA regulate cigarettes as delivery devices for the drug nicotine, over the months he has maintained a studied distance, working quietly through his adviser Bruce Lindsey to keep the negotiations on track. Even last week, when some attorneys general were threatening to leave town and negotiators were practically begging for a thumbs-up signal from the Oval Office, Clinton told the Wall Street Journal that the White House wasn't going to solve the final pieces of the puzzle.

According to Clinton press secretary Michael McCurry, the White House's course of calculated impassivity was chosen for three reasons: the White House thought the tobacco industry would give more if it wasn't rewarded too early; if negotiations collapsed, the Administration didn't want to have said anything that might jeopardize the FDA's proposed oversight of tobacco products or the strength of its case in beating back court challenges; and officials didn't want to endorse a plan they hadn't yet vetted. Again last Friday, Clinton played it coy, saying, "Now what we have to do is to subject the proposed agreement to strict scrutiny." His domestic-policy adviser Bruce Reed and Donna Shalala, Secretary of Health and Human Services, will handle that chore.

Even a Clinton endorsement, however, does not ensure congressional passage of the legislation required to make the proposed settlement law. Last week Senate majority leader Trent Lott of Mississippi predicted that his chamber could not even begin to consider the deal until late fall, giving any of the Hill's 535 legislators ample time to pick apart the agreement. "What is our biggest fear? Congress," says Harshbarger. "Our fear is that all of this hard work could go down the drain."

Beyond the Beltway, the deal has plenty of detractors who may prove only too happy to provide legislators with the ammunition to blow the proposal to bits. Among the attorneys general, the chief naysayer through most of last week was Minnesota's Hubert Humphrey III, who argued that his colleagues were pushing too quickly for a settlement. (And they in turn accused him of grandstanding.) "They're trying to rush this through before we realize we've had our pockets picked," Humphrey said at midweek. He claimed tobacco could pay more than twice the agreed-upon amount, or some $800 billion over the next quarter-century, without putting a dent in overseas profits, stock dividends or executive perks.

In the public-health court, the American Lung Association reacted loudly. It opposes any limits on individual lawsuits or class actions, and expressed particular skepticism about the settlement's prohibitions on youth-oriented advertising. "The ability of the tobacco industry to reinvent itself and circumvent such restrictions," said Lung Association CEO John Garrison, "is remarkable."

Far more remarkable though is the fact that the anemic revolt that began quietly 30 years ago--with a handful of scientists who were concerned about the potential health consequences of smoke and a handful of nonsmokers who were bothered by the constant haze of smoke in their eyes--last week proved that it has achieved enough muscle to bring the tobacco industry to its knees. If the long-lasting cultural parade of Joe Camel and Marlboro Men and cigarette-waving screen stars is not yet quite over, the celebratory band, at least, has most certainly passed.

Manufacturers May No Longer...

-- Use ads with humans or cartoon characters (so long, Joe); advertise on billboards, in stadiums or other outdoor sites, or on the Internet; pay for product placement in movies or theaters. Cigarette vending machines are banned.

New Powers for the FDA

-- The industry concedes full regulatory control over tobacco to the FDA. Cigarette packs will be labeled as a "nicotine delivery device." And the FDA will control the amount of nicotine. It plans to lower the amount gradually over the next 12 years.

Where the Money Goes

--$308 BILLION in compensatory damages to settle lawsuits, including those brought by the states to recover Medicaid expenses and 17 separate class actions. $10 billion to be paid immediately, then annual contributions of $8.5 billion, rising to $15 billion. The money will also pay for enforcement.

--$60 BILLION in punitive damages. Of that $25 billion will be placed in a public-health trust. The rest will fund health coverage for uninsured children.

--$500 MILLION annually to finance an anti-tobacco advertising campaign.

--THE INDUSTRY must fund programs to help smokers quit, and a campaign to reduce smoking by youths by 50% within seven years. Tobacco companies will pay an $80 million penalty for each percentage point that the industry falls short of the target.

What Tobacco Gets

--Immunity from future class actions, which pose the most financial risk to the companies.

--Individuals can still sue (and they haven't won any cases yet), but payments for compensation claims will be capped at $5 billion annually, paid from the funds.